UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 24, Problem 14QP
Summary Introduction
To determine: Value of the bond.
Conversion Price:
The price at which the bonds and
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NUMERICAL QUESTION: Suppose that an investor is considering the purchase of a stock or a
convertible bond of COMPANY S. The stock of the company can be purchased at €20.
The following information is for the convertible bond. The bond has a face value of €1,000, an annual
coupon rate of 4% (coupons are paid every six months) and a maturity of 3 years. Similar bonds are
selling to yield 12% annually. The current market price of the convertible bond is €920. The Time left 1:11:10
ratio is 45.
1. What is the straight value of that bond?
2. What is the minimum value of the convertible bond?
3. Assume that the investor decided to purchase the convertible bond and that 2 months later, the
price of the stock fell to €16. What is the return to the investor from having bought the convertible
bond?
Remember to input your answer without the % sign. For instance, an
answer equal to 1.52% should be entered as 1.52.
Suppose your organization has issued a 30 year, 1,000,000 par-value bond with semi-annual coupons of 7%.25 years after issuance the owner of the bond offers to let your organization redeem the bond early. You can turn down the offer and redeem after 30 years.
1. Should you take the offer if:(a) the market interest rate is 6.5%(b) the market interest rate is 7.5%(c) the market interest rate is 7%(d) the market interest rate is 6.5% and redemption today requires a redemption of 1,200,000
2. What general rule for early redemption can you make?
You have been hired to value a new 20-year callable, convertible bond. The bond has an 8 percent coupon rate, payable annually. The conversion price is $50, and the stock currently sells for $30. The stock price is expected to grow at 14.8698 percent per year. The bond is callable at $1,100; but based on prior experience, it will not be called unless the conversion value is $1,200. The required return on this bond is 10 percent.
What would be the expected rate of return to the investor?
Chapter 24 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 24 - Prob. 1CQCh. 24 - Prob. 2CQCh. 24 - Convertible Bonds and Stock Volatility Suppose you...Ch. 24 - Convertible Bond Value What happens to the price...Ch. 24 - Prob. 5CQCh. 24 - Warrants and Convertibles What is wrong with the...Ch. 24 - Warrants and Convertibles Why do firms issue...Ch. 24 - Convertible Bonds Why will convertible bonds not...Ch. 24 - Convertible Bonds When should a firm force...Ch. 24 - Conversion Price A convertible bond with a par...
Ch. 24 - Conversion Ratio A convertible bond with a par...Ch. 24 - Conversion Premium Eckely, Inc., recently issued...Ch. 24 - Convertible Bonds Hannon Home Products, Inc.,...Ch. 24 - Prob. 5QPCh. 24 - Convertible Bond Value An analyst has recently...Ch. 24 - Convertible Bond Value Sportime Fitness Center,...Ch. 24 - Convertible Bonds You own a callable, convertible...Ch. 24 - Prob. 9QPCh. 24 - Convertible Bonds Vital Silence Corp. bas just...Ch. 24 - Convertible Bonds Rob Stevens is the chief...Ch. 24 - Prob. 12QPCh. 24 - Prob. 13QPCh. 24 - Prob. 14QPCh. 24 - Warrant Value Superior Clamps, Inc., has a capital...Ch. 24 - Prob. 16QPCh. 24 - SS AIR'S CONVERTIBLE BOND Chris Guthrie was...Ch. 24 - What is the floor value of the SS Air convertible...Ch. 24 - What is the conversion ratio of the bond?Ch. 24 - What is the conversion premium of the bond?Ch. 24 - What is the value of the option?Ch. 24 - Is there anything wrong with Todds argument that...Ch. 24 - Is there anything wrong with Marks argument that a...Ch. 24 - Prob. 8MCCh. 24 - During the debate, a question comes up concerning...
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- You have been hired to analyze a new 20-year Callable Convertible Bond. The bond pays a 6% coupon annually, and is selling at par. The conversion price is $150 and the stock is currently selling at $35. The bond is callable at $1,150, but analysts believe that the bond will not be called unless the conversion value reaches $1,250. The YTM of a 20-year non-callable, non-convertible bond is 8.5%. (a) What would be the price of the bond if it did not have the call and conversion features? (b) Would the bond sell at a premium or a discount if it was convertible but not callable? (c) Would the bond sell at a premium or a discount if it was callable but not convertible?arrow_forwardA convertible bond has a coupon of 7.5 percent, paid semiannually, and will mature in 15 years. If the bond were not convertible, it would be priced to yield 6.5 percent. The conversion ratio on the bond is 20 and the stock is currently selling for $63 per share. What is the minimum value of this bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Minimum valuearrow_forwardYou have been hired to value a new 20-year callable, convertible bond. The bond has a coupon rate of 5.9 percent, payable semiannually, and its face value is $1,000. The conversion price is $64, and the stock currently sells for $51. a. What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 7 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the conversion premium for this bond? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forward
- H5. callable bonds Given an 8% annual coupon and a conversion price of $100the stock sells at $25, and there is a forced conversion if the value is everequal or greater than $1200,the required rate of return is 12% and the bond runs 20 years a) Calculate the minimum price of the bond b) If the stock grows 15% per year into perpetuity How long will it take to reach/exceed the $1200 threshold Show proper calculationarrow_forward1. A three-year bond with a $1,000 face-value and 10% coupon rate is sold for $1,000 today (Year 1). If one year later (Year 2) the market interest rate decreases by 5%, then this bond will have a market price of $ ____ (round UP to the nearest integer) next year (Year 2). 2. True or False? The current interest rate on a 10-year coupon bond with face value = $1,000 and annual coupon rate = 3.25% is2.42%. This implies the buyer of the bond will receive a $24.2 payment from the bond issuer every year before maturity while holding the bond. 3. A three-year bond with $1,000 face-value and 10% coupon rate is sold for $1,000 today (YEAR 1). If one year later (Year 2) the market interest rate increases by 5%, then this bond will have a market price of $ ________ (round UP to the nearest integer) then (Year 2).arrow_forward(Bond valuation) You own a 10-year, $1,000 par value bond paying 8 percent interest annually. The market price of the bond is $825, and your required rate of return is 12 percent. a. Compute the bond's expected rate of return. b. Determine the value of the bond to you, given your required rate of return. c. Should you sell the bond or continue to own it? ... a. What is the expected rate of return of the 10-year, $1,000 par value bond paying 8 percent interest annually if its market price is $825? % (Round to two decimal places.)arrow_forward
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